Felix Salmon

Debt demand datapoint of the day

Felix Salmon
Feb 16, 2010 16:37 UTC

Insofar as there’s a decline in lending going on these days, it’s a function of both lower demand for credit and of reduced willingness to lend on the part of banks. Bloomberg has a startling datapoint on the demand side:

Caterpillar Inc., Eaton Corp., Walgreen Co. and General Electric Co. are among 256 companies that ended last quarter with $518 billion more cash than a year earlier after cutting capital spending by 43 percent.

But hang on a minute. Bloomberg here seems to have taken the S&P 500 and deliberately chosen the companies which raised cash and cut spending, while ignoring those which went the other way. In order to put these latest figures in perspective, I think it would only be fair to run the same exercise for previous years, to see what the equivalent figures have been historically.

What’s more, to the extent that some S&P 500 companies have historically borrowed and spent too much, thanks to abundant credit, it might actually be a good thing that they’re bolstering their cash cushions and moving to a more sustainable footing. Well, a good thing for the companies, anyway. Not such a good thing for employment.

That said, gains in employment have rarely if ever been driven by hiring in the S&P 500. If you want to see bank loans turned into jobs, the key sector to look at is not big companies but small ones. And when it comes to them, I think that the decline in bank lending is much more of a supply issue than it is with the S&P 500. If banks were more willing to lend to small businesses, I think that we would certainly see more loans taken out — and higher employment as a result.


Here’s an article that references the NFIB: http://www.americanbanker.com/usb_issues  /120_2/holding-pattern-for-borrowers-10 06105-1.html

They’ve had lending-related press releases at their website, but I couldn’t find them the last time I checked. They may not be archived.

Dunkelberg was interviewed by Tom Keene at Bloomberg a few months back. He’s the chairman of a young bank, so he has some personal experience here.

I’m not saying the situation is all the other way. It’s a bit murky, and small business seems to be in limbo right now.

Posted by Mega | Report as abusive

The Greek derivatives aren’t Goldman’s fault

Felix Salmon
Feb 16, 2010 13:54 UTC

The first thing you have to know about the Greece-Goldman story is that the definitive account was published by Nick Dunbar of Risk magazine in July 2003. He kicked off by saying that the deals he was writing about “are likely to prove controversial” — he probably never guessed just how controversial they would end up being, nor how long it would take them to achieve that status.

The details of the deal are more or less what I suspected, and indeed the Spiegel story hews so closely to Dunbar’s account that the Risk article was clearly a primary — if not the primary — source. Here’s Dunbar, explaining what went on:

The cross-currency swaps transacted by Goldman for Greece’s public debt division were ‘off-market’ – the spot exchange rate was not used for re-denominating the notional of the foreign currency debt. Instead, a weaker level of euro versus dollar or yen was used in the contracts, resulting in a mismatch between the domestic and foreign currency swap notionals. The effect of this was to create an upfront payment by Goldman to Greece at inception, and an increased stream of interest payments to Greece during the lifetime of the swap. Goldman would recoup these non-standard cashflows at maturity, receiving a large ‘balloon’ cash payment from Greece…

It seems the total credit risk incurred by Goldman Sachs was roughly $1 billion. Effectively, Goldman Sachs was extending a long-dated illiquid loan to its client.

Dunbar also goes into a lot more detail about the fees on the transaction than the NYT does. I think it’s reasonable to accuse the NYT of being unfair to Goldman when it writes that Greece “paid the bank about $300 million in fees for arranging the 2001 transaction”. The point here is that because this is a cross-currency swap rather than a bond deal, the interest payments are going the wrong way: Goldman is sending Greece a steady stream of payments over the course of the deal, and then being repaid with a big balloon payment at the end. Essentially, Goldman is continually lending Greece money, and getting no interest payments in return, until maturity a long way out.

So the fee associated with the deal isn’t a fee for arranging the transaction, as the NYT would have it: instead, it has to cover all of the credit and market risk that Goldman Sachs is taking on in lending the money to Greece. What’s more, a very large chunk of the fee was immediately paid to Depfa, which sold Goldman a $1 billion 20-year credit default swap on Greece to hedge its credit risk. And for what it’s worth, Dunbar’s article puts Goldman’s total charge for the transaction at $200 million, not $300 million: I have no idea which figure is more reliable.

It’s also a bit disingenuous of the EU to start saying now that Eurostat was not aware of the transaction. Put aside for one minute the fact that Eurocrats have been known to read Risk; Dunbar’s article actually goes into some detail about how the Eurocrats knew exactly what was going on:

The drafting of ESA95’s section on derivatives was the subject of fierce arguments between the government statisticians and debt managers of certain eurozone countries.

The statisticians wanted derivatives-related cashflows to be treated as financial transactions, with no effect on deficit or interest costs, and with the derivatives’ current market value stated as an asset or liability. The debt managers opposed this, insisting on having the freedom to use derivatives to adjust deficit ratios. The published version of ESA95 reflects the victory of the debt managers in this argument with a series of last-minute amendments.

In particular, ESA95 states in a page-long ‘clarification’ that ‘streams of interest payments under swaps agreements will continue… having an impact on general government net borrowing/net lending’. In other words, upfront swap payments – which Eurostat classifies as interest – can reduce debt, without the corresponding negative market value of the swap increasing it.

In other words, Eurostat knew that Greece, Italy, and others were planning this kind of deal even before they happened, thanks to their successful lobbying efforts with respect to ESA95, and it was inevitable that they would structure deals with investment banks doing exactly what they did.

So while it’s entirely fair to blame Greece for trying to hide its debt, and to blame Eurostat for letting it do so, I think that blaming Goldman is harder. It was surely not the only bank involved in these transactions, and the swaps were simple enough to be shopped around a few different banks to see which one could provide the best deal. Structuring swaps transactions is one of those things which investment banks do. If countries like Greece buy swaps in order to hide their true fiscal status, then that’s the country’s fault, not the banks’. No self-respecting bank would decline such a transaction because they felt it was unfair to Eurostat.

Yes, I’m sure that Goldman put a team of people onto the Eurostat rules and made that team available to the Greeks. But let’s not blame the advisers here, for structuring something entirely legal and which the Greeks and Italians clearly wanted to be able to do all along. This is a failure of European transparency and coordination; Goldman is a scapegoat.


I agree with you and contend that:
The Greek government requested explicitly this kind of deal to meet the criteria to get into the Euro;
The European Commission (its officials and desk officers) which is in charge to monitor member states’ economies knew about it;
Eurostat (its officials and missions team members) which provides data to “certify” the national accounts knew about the deal and did not construed it as a problem of regularity and legality.

Alternatively we have to think that officials in the EU institutions are incompetent (some really are about swap deals at least) and they did not see this coming. However bearing in mind the size of the operation and the numbers the deal cannot go unnoticed (particularly for Bank of Greece and balance of payments accounts).

Moreover some officials dealing with this in the European Commission and Eurostat are and were Greek.

Under the above circumstances one would conclude that Goldman Sachs provided the requested services and of course made money with it.

Posted by M.G.inProgress | Report as abusive

Simmons leaves Goldman’s board

Felix Salmon
Feb 13, 2010 10:22 UTC

On Tuesday, Brown president Ruth Simmons explained that the decision as to whether she should continue to sit on the board of Goldman Sachs was a complex one which would not be taken lightly:

If Simmons were to leave Goldman’s board, she said, she does not think she would join another board…

One reason Simmons cited not to seek out new positions was that the seniority she now enjoys on Goldman’s board allows her to advocate for programs to help women and minorities.

Simmons said that, as with her retirement from Pfizer’s board three years ago, when to call it quits with Goldman will not be a decision she makes by herself, but rather in cooperation with the Corporation, the University’s highest governing body, with which she meets regularly to evaluate her actions.

“I feel very strongly that I don’t know enough as an individual — a sole individual — to make that decision alone,” she said.

On the other hand, it seems that complex decisions on such matters can still be taken quickly. Goldman put out a press release on Friday afternoon, just as the long weekend was starting, saying that Simmons was leaving the board, and citing “increasing time requirements associated with her position as President of Brown University”.

Happily, Simmons leaves with Goldman stock resurgent: her 27,386 restricted stock units are worth $4.2 million right now, and can be sold the year after she retires from the board; she also has another 10,000 options on top of that. Goldman Sachs board members, it seems — who are all members of the compensation committee — are compensated as well as you might expect from the company which invented the $68.5 million CEO bonus.

I said after Tuesday’s interview with Simmons was published that she seemed to think about her membership on Goldman’s board much more in terms of what it could do for her and her pet causes than in terms of being a shareholder representative tasked with overseeing senior management, and I called for a revamp of the board. Friday’s news is exactly the step in that direction that I was looking for: maybe Simmons took my comments to heart!


So without Simmons, Goldman wouldn’t have much in the way of “programs to help women and minorities”? I can’t imagine the women and people of minority heritage who actually work at Goldman appreciate the clumsy implication that whatever success they have had must be due to someone else’s “help.” Or are these programs in the community? In that case, why does she need to be a current board member of Goldman to support them?

Posted by SelenesMom | Report as abusive

The marriage of Figaro and paywalls

Felix Salmon
Feb 12, 2010 19:38 UTC

France’s Le Figaro has unveiled its own freemium version of a paywall, and it’s an interesting model. Fresh news is free; old news disappears into an archive. Once you’ve registered, you can get emailed newsletters and can comment on articles; if you pay €8 per month you get French versions of New York Times articles and 30 articles per month from the archive, as well as various social-networking bells and whistles. And for €16 per month you can get 90 stories from the archive, as well as two business newsletters, and a concierge service for restaurant and travel reservations.

Interestingly, the social-networking bells and whistles at the €16/month level are “focused around business networking” — this essentially uses your willingness to pay that kind of money as a signalling device, indicating that you might well be someone worth doing business with. There’s also an interesting distinction being made between being allowed to comment, on the one hand, and being allowed to contribute your own stories, on the other. Although it’s a little bit worrying that people are now being asked to pay for the privilege of providing content to news sites: it kind of turns the old-fashioned business model — of paying journalists for their contributions — on its head.

My feeling here is that the premium services aren’t designed as money-makers, in and of themselves, so much as they’re designed to build the kind of brand loyalty among online subscribers that Le Fig currently has among its print subscribers. Paying money for something makes you feel more fondly towards it — especially when doing so means that you become part of a select social network. I’m sure that once people start subscribing to the paper’s website, they’ll start visiting it many more times per month than they do currently, and thereby help increase, rather than decrease, its total advertising revenue.

This, then, if it works, is a paywall done right — although the blogosphere is going to want some way to be able to link to articles while knowing that the linked articles aren’t going to disappear behind an archive paywall in a few days or weeks. But more to the point, if it doesn’t work, then little harm is done, and Le Fig can dismantle it without embarrassment. It’s a low-cost experiment, not a high-profile directional bet on the future of online journalism. Such bets have an astonishingly low success rate, and it behooves all news organizations to avoid them. NYT, take note.


In whose book does paying money for something behind a wall make the heart grow fonder?

Posted by HBC | Report as abusive

The destruction of the Polaroid photo collection

Felix Salmon
Feb 12, 2010 17:55 UTC

I’m disappointed in the way in which the NYT’s Carol Vogel swallowed the disingenuous rationalizations of the vandals tearing apart the unique and irreplaceable Polaroid photography collection:

To pay off creditors, a bankruptcy court in Minnesota is forcing Polaroid to sell a portion of its collection at Sotheby’s in New York on June 21 and 22. On offer will be 400 photographs by Ansel Adams alone, along with prints by Mr. Close, Mr. Wegman, Robert Rauschenberg, David Hockney, Robert Frank, Robert Mapplethorpe, Warhol and Lucas Samaras. Together the 1,200 objects are expected to fetch $7.5 million to $11.5 million…

What Sotheby’s is selling is just a fraction of Polaroid’s holdings however. There are still more than 10,000 images in a Massachusetts warehouse that could end up in a museum in the future, Mr. Stoebner said…

When selecting the most valuable (and salable) photographs from the collection, Ms. Bethel said she sought a wide price range in the hope of attracting new or young collectors. Thus the auction includes a Wegman dog image estimated at $3,000 to $5,000 and an Adams mural expected to bring $400,000 to $600,000.

Never mind, as Lindsay Pollock notes in her article on the sale, that Polaroid made promises to the artists that will be impossible to keep once the photos are sold to anonymous buyers at auction. The fact is that Stoebner and Bethel have simply creamed off the top 10% or so of the collection — the most valuable works from the biggest-name artists. In doing so, they’ve turned the remaining 90% of the collection, which Stoebner purports to believe could ” could end up in a museum in the future”, into a liability rather than an asset, and something which no museum will ever want.

As for the idea that Sotheby’s “sought a wide price range in the hope of attracting new or young collectors”, the fact is that they just carried on down the Polaroid collection until they ran out of recognizable names which had a decent chance of selling. If they’re selling a Wegman dog image for $3,000 to $5,000, you can be sure there’s nothing in the remainder of the collection which is worth much more.

The really big question, of course, as Marion Maneker asks, is why the collection is being sold off in pieces to begin with. It might be the easiest way to raise the maximum amount of money in the minimum amount of time, but if the decision is purely mercenary, then Stoebner shouldn’t be presenting himself as some kind of high-minded custodian who’s talked to “several museums” about preserving the collection in toto. Insofar as he talked to the museums, I’m sure he was just angling for a sum of money greater than the minimum guarantee offered by Sotheby’s — or else just trying to get a baseline number which he’d then ask Sotheby’s to match.

The Sotheby’s sale constitutes the destruction of a lovingly-constructed artistic endeavor which was ultimately doomed by the greed and fraud engaged in by the chain of speculators and chancers who levered up and broke down the Polaroid company as though it were any other financial commodity. It’s a crying shame, and the art press should be railing against it, rather than talking it up as some kind of art-market milestone.


If you work with a lot of artists and 10% of your collection ends up being salable at auction, that’s a *high* hit rate, not a low one.

Financial reform in the Senate

Felix Salmon
Feb 12, 2010 15:42 UTC

I’m more than a little confused about the political jostling surrounding the financial-reform bill in the Senate. In the wake of Chris Dodd giving up talking to Dick Shelby and deciding to work with Bob Corker instead, he’s put out a statement saying that “I am more optimistic than I have been in several weeks” about the prospects for the bill, and Daniel Indiviglio is surely right when he says that “it’s definitely a significant development that even one Republican is willing to work with Dodd”.

At the same time, however, Judd Gregg is also surely right when he tells Reuters that “this really isn’t a partisan issue”. Democrats have historically been just as craven when it comes to the banking lobby as have Republicans — arguably more so, in many cases. And with some tough elections coming up and some very large campaign contributions at stake, many Democratic Senators would probably quite like not to anger the banking lobby too much between now and November.

I do wonder how we got to this point: how is it that the Republicans, who rail against Wall Street just as much as their opponents, can’t seem to get behind a bill? By all accounts the sticking point is the Consumer Financial Protection Agency: Gregg has gone so far as to call it “the only really big philosophical difference here”, and Corker doesn’t seem to be particularly constructive on that front: he says that “Senator Dodd and I have agreed to set that topic aside for now”.

What I fear is that if Corker and Dodd can come to agreement on what Corker calls the “technical issues” at the heart of what is sure to be an enormous bill, Dodd will be forced to drop the CFPA lest he see the entire bill disintegrate. And I have no idea how you could possibly reconcile a Senate bill sans CFPA with a House bill which has a CFPA front and center.

I also wonder about the implicit 60-vote supermajority which Dodd seems to think he needs to get anything passed: is that strictly necessary? Are there really Republicans who would stick their neck out and filibuster a financial-reform bill aimed at reigning in Wall Street? Voting against it is one thing, but killing it with a filibuster is surely not a vote-winner anywhere in the US right now. Certainly the rhetoric coming from the likes of Gregg doesn’t suggest to me that the Republicans are in any way philosophically opposed to any bill along these lines being passed.

But this is all Washington politics, which always confuses me greatly: my colleague Jim Pethokoukis, who understands it much more than I do, has already advanced a chess move or two and decided that Mitch McConnell is now the Republican in the driving seat. In any case, what’s clear is that we’re not in the much more simple world of the House, where Barney Frank reigns more or less supreme. Dodd, who’s not standing for re-election, is quite independent at this point and isn’t necessarily going to work as closely with the White House as Frank did; meanwhile, the Republicans seem to be in a position of considerable power, while having very little in the way of a coherent idea of what exactly they want to achieve or block.

So, it’s still a mess, and it’s far from obvious whether there’s anybody at all in the Senate who has the power and determination to push once-in-a-generation legislation like this through. I’ve been pessimistic throughout this process: after decades of getting exactly what they want, I just can’t believe that the banking lobby is now going to end up getting exactly what they don’t want. I’m pessimistic still. But at least the Corker news keeps a glimmer of hope alive.

Update: Kevin Drum finds this TV ad, in which the financial-reform bill is painted as a $4 trillion tax-and-spend bank bailout bill. WTF? If this is the level at which political discourse on this subject is operating, we’re all doomed.


If it took partisan Jim P. to make semblance of sense out of any economic situation, it would be a scenario in which we are all indeed doomed. Luckily for all concerned, it doesn’t.

Try this instead:
http://baselinescenario.com/2010/01/19/a -trap-of-their-own-design/

Posted by HBC | Report as abusive

Mike Konczal is a renter

Felix Salmon
Feb 12, 2010 11:49 UTC

Mike Konczal is on a roll these days, pointing out how there’s a strong tendency towards having one rule for the rich and another for the poor. On Wednesday he pointed out that when Fed governor Kevin Warsh called for banks to have “readily comparable” funding sources, he was really calling for exactly the kind of vanilla option that Barney Frank lost no time in removing from the act creating a Consumer Financial Protection Agency. The following day, he drew a bead on those — South Carolina Lt. Gov. Andre Bauer among them — calling for drug tests to be administered to anybody claiming welfare payments:

I think I can support this idea if, and only if, it is also required that people who claim a mortgage interest tax deduction are also required to take a drug test.

But Konczal’s not just good at the one-liners: he can also do some serious number-crunching. Right after posting the drug-test blog entry, he unveiled a two-parter on the mathematics of mortgage modifications for underwater borrowers which is required reading for anybody who thinks that we’re achieving anything at all by reducing interest rates and not principal.

It’s worth remembering, in this context, that a foreclosure is essentially a loan modification where the whole mortgage is paid off at once and the principal is massively reduced. That’s why strategic non-foreclosure exists, and why homeowners are sometimes begging their banks to foreclose, only for the bank to refuse to do so — see Konczal, again.

Theoretically, any bank willing to enter into foreclosure proceedings should also be willing to allow the homeowner to refinance their mortgage elsewhere, paying off their existing loan at say 50 cents on the dollar. (Or even less, if the numbers in this chart are to be believed.) But the banks have a secret weapon: foreclosure is extremely painful and disruptive for homeowners. One of the reasons that the foreclosure rate has lagged so far behind the delinquency rate (guess who) is that the threat of foreclosure is one of the most powerful tools that banks can use to squeeze every last drop of blood out of a homeowner before finally tossing them out. Once foreclosure proceedings have started, no homeowner is likely to cough up any money at all.

I spent an hour last Wednesday, along with Megan McArdle, on a Nevada Public Radio phone-in show devoted to the topic of walking away from your home. It turns out that the two of us are really not that far apart, and that Megan is more than willing to recommend walking away to just about anybody who is underwater on their mortgage and who can only make their mortgage payments by dipping into savings rather than simply paying out some of their income. In any case, if there’s one thing that just about everybody should be able to agree on, it’s that if you’re going to lose your home to the bank anyway, there’s no point at all in killing yourself trying to continue to make payments.

So that’s a good place to start, I think: if your bank is being utterly uncooperative, constantly losing your paperwork or telling you that it won’t even begin negotiations until you turn up with a check for $200,000 (one story from a caller in Nevada), then give up: their strategy is clear. They have no intention of trying to keep you in your home, they’re just trying to keep you paying them money for as long as possible before they kick you out.

All too often one hears stories of people who get a foreclosure notice and move out of their homes, only to continue to own the home indefinitely as the bank fails to pull the trigger. That’s an excruciating position to be in. Much better to just stop making your mortgage payments and stay put, ignoring the bank when it says that it will foreclose, until it actually does foreclose. If they overreach and do something like try to change the locks on you before taking ownership of the house, then at that point a good lawyer should be able to keep you in the home for a very long time, rent-free. On the other hand, if the bank approaches you with a sensible mortgage modification — one where the principal goes down rather than up, for instance, and where the lender takes at least some of the losses that they would suffer in the event of a foreclosure — then you can start talking to them seriously. Just don’t hold your breath waiting for that to happen.

And if you’re thinking about buying a house, just remember that there are a lot of very happy renters out there too. Mike Konczal is one of them, and he clearly knows what he’s doing.


Felix Salmon
Feb 12, 2010 02:00 UTC

Microlender Accion USA Avoids ‘Antipoverty’ Pitch — American Banker

Online Robbery: Hackers Steal $50,000. Bank Says ‘Tough Luck’ — MoneyWatch

Economists’ Hubris — SSRN

Many Happy Returns: Remittances and their Impact — Immigration Policy

The mother of all bank re-securitisations — Alphaville

The Big Lie About the ‘Life of the Mind’ — Chronicle

The advantage to sailing the open sea: “there’s so much less to bump into” — Smiling Footprints

Comments are the new “to be sure” graf — Gawker

The Tobin Tax gets the Richard Curtis rebranding treatment — Guardian

Iceland hires the one and only Lee Buchheit, of CGSH — AmLaw

Vote for the Dynamite Prize in Economics, for the economists who contributed most to the Global Financial Collapse — RWER


http://www.chicagoreader.com/TheBlog/arc hives/clout-city/

Since you’ve commented before on the Chicago Parking Meter privatization thought you might be interested in the above. Looks like other municipalities are hiring the same firms who consulted on this project to privatize their own assets.

Posted by Otis | Report as abusive

The problems with a nationwide VMT tax

Felix Salmon
Feb 11, 2010 12:50 UTC

Andrew Samwick calls a tax on vehicle miles travelled (VMTs) “one of the most ridiculous policy proposals I’ve read in a while”, and Ryan Avent responds with a defense of the idea. The weird thing, here, is that they’re both right. Samwick agrees with Avent that congestion charges — essentially VMT taxes which vary according to the route you take and the time of day that you drive — are “worthwhile policy measures”. And it’s pretty clear that if we’re going to have congestion charges, we’re going to need to implement some kind of VMT-tax technology. (I’m a fan of Skymeter, myself.)

So yes, a flat nationwide VMT tax makes little sense — but the fact is that once VMT-tax technology was introduced, it would have lots of knobs and dials allowing it to be anything but flat, and to charge much more for VMTs in central business districts during rush hour than for VMTs in the middle of Wisconsin on a Sunday afternoon.

The problem is in the implementation: it’s hard to have a compulsory VMT tax, since that involves attaching some kind of meter to every American’s car, and Americans are not going respond well to that idea. Hell, even New York cabbies went on strike to protest GPS devices being put in their vehicles to track their every movement.

A single city can implement VMT metering by attaching carrots as well as sticks: cheaper and more convenient on-street parking, say, for metered vehicles, and lower insurance, based on miles travelled rather than a flat monthly fee. And people who still opt out of the scheme can just be charged very large sums manually for entering the city — something eminently doable in Manhattan, for instance, simply by installing a couple of tolls on East River bridges. But that kind of thing doesn’t scale well to the nation as a whole, and there really is something quite creepily Big Brotherish about trying to track every single vehicle in America.

So although I’m a fan of a cap-and-trade system over a carbon tax, and although in theory a VMT tax is to the gas tax as cap and trade is to a carbon tax, I can’t get very excited about the idea of a nationwide VMT tax. The difficulty of implementing it is just too great, and the marginal upside is too small. Let’s start with a couple of cities, and work out from there. Starting nationwide is far too ambitious.


The answer to traffic conjestion isn’t more taxes, its technology. Check out KPTV in Portland. They put webcams around the city at major traffic areas and anybody with internet can check before their commute if they should take another route or postpone their trip until another time. If people around the country had real time webcam info and traffic bulletins/advisories, part of the driving population wouldn’t be flying blind, thereby reducing some of the conjestion. If government were really doing their jobs, they would have more and better electronic signs on the highways giving us advanced warning of upcoming conjestions and alternate routes to take. Car pooling and park and ride schemes also help but eventually we need to think about decentralizing big urban areas, there are too many drivers and too few roads in some places.

Posted by csg57 | Report as abusive